If the economy is experiencing inflation,which of the following is most likely to decrease aggregate demand?
A) Increasing spending and cutting taxes
B) Increasing spending and raising taxes
C) Decreasing spending and cutting taxes
D) Decreasing spending and raising taxes

Question

Quizplus · Accepted Answer

Decreasing spending and raising taxes are contractionary fiscal policies, which can decrease aggregate demand. This is because decreasing government spending reduces the amount of money flowing into the economy, and raising taxes reduces disposable income, both of which can lead to decreased overall demand. This can help to combat inflation by reducing the overall level of demand and putting downward pressure on prices.

Option A (Increasing spending and cutting taxes) is an expansionary fiscal policy, which can increase aggregate demand and exacerbate inflation. Option B (Increasing spending and raising taxes) can also increase aggregate demand, but raising taxes reduces disposable income, which can partially offset the increase in spending. Option C (Decreasing spending and cutting taxes) is a mixed policy, as cutting taxes can increase disposable income and boost demand, while decreasing spending can reduce demand, so the overall effect on aggregate demand is unclear.

If the Economy Is Experiencing Inflation,which of the Following Is